No. of Recommendations: 1
Greetings, dccowboy, and welcome. You wrote:

I need to convert my 401K (which is less than $5K) from my previous company's pension plan. I know I want to invest in a Roth IRA. I have been told by an on-line broker that I cannot comingle funds if I roll the 401K directly to a Roth - which means to me that I can't make contributions to the Roth acct. in the future since the source of the monies is different (cash and 401K)? Is is better to take the tax penalty and have the 401K funds issued to me and then establish a Roth IRA with the remaining funds which will enable me to make contributions each year? My intention is to invest the Roth funds in stocks.

I think what your broker is trying to get across is that you cannot transfer 401k funds directly to a Roth IRA. A Roth may accept rollover money only from another Roth or from a traditional IRA.

If you take the 401k money, you still can't transfer it to a Roth IRA, only a traditional IRA, and you will run into a tax hassle at the same time due to a withholding issue. Additionally, you may even encounter income taxes and an early withdrawal penalty on the money that must be withheld when you take the 401k instead of transferring it to a traditional IRA.

To ensure you encounter no tax problems, you must transfer the 401k money to a traditional IRA first. Once in the traditional IRA, the money may be further transferred to the Roth. Arrange for a direct transfer from the plan custodian to the traditional IRA custodian and from the traditional IRA to the Roth IRA. That way you won't have any possiblity of a tax problem. Your broker and your plan administrator can walk you through the necessary administrative hoops to ensure direct transfers take place.

Once the money is in the Roth, you may no longer transfer it back to a new employer's plan that accepts rollover money from an old employer's plan. If you wish to do that in the future, then you should leave the money in the traditional IRA. However, if you do convert to the Roth, then you may make annual contributions to that Roth IRA.


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